Increased demand from retail investors in leveraged loans due to more
focus on interest rate risk is driving investment by U.S. closed-end
funds (CEFs) in loan products, according to a Fitch Ratings report.

Since the first half of 2009, total assets for loan CEFs have increased
by $23 billion and the overall number of funds has increased to 28 from
22.

The performance of leverage loans - both prices and default rates - has
improved significantly since the financial crisis. This in turn has
boosted CEF net asset values (NAV) and providing substantial asset
coverage to rated CEF leverage. Since mid-2011, performance has been
less volatile for the sector as secondary loan prices have settled at or
above par given the favorable market trends.

However, risk appetite and leverage in the capital markets is
increasing, with the current credit cycle resembling the time frame of
2005 to early 2006. While growth expectations for 2014 are more subdued
compared to the last upswing, the first half of 2014 showed signs of
credit expansion. Leverage among non-investment grade corporate issuers
is also increasing. Fitch also notes that in the current low interest
rate and low default rate environment, investors may regard the yield on
loan products as a solid risk-adjusted return.

Fitch also notes that a larger number of funds have replaced term
securities with variable-rate term preferred (VRTP) securities, a trend
that Fitch expects will continue.

Fitch currently rates $3.8 billion of notes and preferred shares issued
by ten loan CEFs. Fitch-rated loan CEF portfolios are fairly diverse in
terms of both sector and issuer concentration.

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